Capital Markets Commentaries

Posted on January 8, 2018 by capaccel

January 7, 2018 – The labor market ended 2017 with December payroll growth of 148,000, below expectations of 193,000 but a respectable showing nonetheless. A similar monthly pace in 2018 would be enough to push the unemployment rate, which stayed at 4.1% in December, below 4%. During the fourth quarter, the U.S. economy created 612,000 jobs, bringing the total for 2017 as a whole to 2.1 million. Wages grew 0.3% in December but just 2.5% over the past 12 months. The latest payroll data supports the Fed’s intended path to gradually raising rates in 2018. Expectations remain firm the Fed will lift rates three times in 2018 with the first hike expected in March where market-implied odds remain at 79% for the Fed to act.

Looking back on the equity, rate and credit markets of 2017, the S&P 500 index notched 62 record-high closes for a 21.83% overall gain. More surprisingly, en route to that gain, the index provided a positive return in every month of the year for the first time ever, without a single correction of 5% or more. In fact, there were just eight days in which the S&P 500 rose or fell by 1% or more in a single trading session. On a daily basis, the index rose or fell by 0.50% or less 80% of the time. Treasury yields finished the year at 2.40% as measured by the 10 year Treasury after starting 2017 at 2.42%. While the 10 year Treasury hardly moved over the course of the year, 2 year Treasuries rose 70 basis points causing the yield curve, as measured by the spread between 2 and 10 year treasuries, to flatten to a spread of 50 basis points, the lowest spread in the last 10 years. The Fed’s tightening in 2017 and expected tightening in 2018 and beyond are responsible for much of the flattening. Investment grade corporate credit spreads and high yield credit spreads tightened roughly 46 basis points over the year as cash rich investors needed to put money to work. Looking forward, the recently passed corporate tax cuts will fuel optimism about 2018 earnings and could provide a further lift to equities and a further tightening of credit spreads. Additionally it will be important to watch for signs of inflation, which to date have been absent, and monitor labor force participation. More expansion of the labor force will reduce wage pressure enabling the Fed to raise rates more slowly. However, should the labor force not increase, we could finally see more wage growth encouraging the Fed to tighten more aggressively over time.

For Alternative Lenders, 2017 was the perfect environment of continued low rates, tight credit spreads, low volatility and strong investor appetite for risk adjusted assets resulting in continued growth for platforms. So far, 2018 is starting out as a continuation of that theme. Consumer lender and personal finance company MoneyLion announced that it has raised a $42 million Series B funding round led by existing investor Edison Partners, with participation from other existing investors including Fintech Collective, Grupo Sura, as well as new investors Greenspring Associates and Danhua Capital. Small business lender Funding Circle, and INTRUST Bank, a regional bank headquartered in Kansas, announced that INTRUST will begin funding U.S. small business loans originated through Funding Circle. Look for a very active 2018 in the Alternative Lending space.

Opinions expressed within the commentary are general opinions of Chris Lalli and are not opinions of CapAccel. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions.

Sources: TIAA-CREF, Wall Street Journal, PeeriQ

Posted on December 10, 2017December 11, 2017 by capaccel

December 10, 2017 – November’s employment report was a repeat of what has been seen many times over the past few years: strong job creation but soft wage growth. The U.S. economy added 228,000 payrolls, while the unemployment rate remained at a 17 year low of 4.1%. The labor-force participation rate, 62.7%, also held steady. Growth in average hourly earnings rose only 2.5% year-over-year, below forecasts for 2.7%, and October’s initial 2.4% figure was revised downward, to 2.3%. Even the Fed’s preferred inflation barometer, Personal Consumption Expenditures (PCE) increased only 0.1% in October and 1.6% over the past 12 months. The “core” PCE index, which excludes food and energy, rose 0.2% and 1.4% compared to a year ago. At some point, wages and inflation are expected to rise more quickly, but for the moment, growth remains strong while inflation and wage pressure remain absent. Despite this, markets are pricing a hike in the Federal Funds rate at the upcoming FOMC meeting December 13 as a done deal. Looking to 2018, expectations are for policymakers to raise rates gradually, with three hikes in 2018 as a baseline unless the data and the Fed tell us otherwise next week.

As the prospects for tax reform gets closer to reality, equities continue to rally while bond markets are sanguine. For November, the S&P 500 gained 3.1%, its eighth consecutive monthly advance. Year to date through December 1, the index has returned over 20%. Yields on both 2- and 10-year Treasuries were little changed for the past few weeks, closing at 1.79% and 2.38%, respectively. The yield curve remains close to its flattest point in a decade as the Fed continues its slow march to raising rates. For the year, the yield on the 10 year Treasury has declined 6 basis points trading in a very narrow 50 basis point range, while the 2 year Treasury has risen 58 basis points since the beginning of the year from 1.21% to 1.79% as the Fed has gradually raised rates and expectations remain for more hikes in 2018 despite no wage or price pressures.

The Alternative Lending space remains extremely active as investors look to put money to work in the low rate, low credit spread, low volatility environment. Upstart priced UPST 2017-2, a $175 million of securities with the senior single-A minus rated tranche pricing at a 90 basis point spread, slightly tighter than 95-100 guidance. Lending Club priced their second prime securitization, CLUB 2017-P2, $314 million of securities in which its A class priced at an 85 basis point spread, 12 basis points tighter than CLUB 2017-P1 A class from September. Lending Club also completed a first-of-its-kind transaction in the alternative lending space by selling a whole loan pass through security. The $25 million transaction size was sold to a single institutional investor. Lending Club held 5% to comply with risk retention rules. The transaction is notable primarily as the whole loan security will expand the universe of buyers. SoFI priced its 6th student loan securitization, SOFI 2017-F, a $769 million deal that was upsized from an announced $565 million. Notably, the deal had the lowest WA 3-Year CDR among all SOFI deals in 2017. Barclays joined Goldman Sachs’ Marcus announcing it will originate unsecured personal loans online. Marcus has originated over $2 billion of loans so far.

Opinions expressed within the commentary are general opinions of Chris Lalli and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources: TIAA-CREF, Wall Street Journal, PeeriQ

Posted on November 19, 2017November 20, 2017 by capaccel

November 19, 2017 – Volatility returned after a long absence in both the equity and fixed income markets as investors fretted about a wide range of issues including uncertainty around U.S. tax reform, cracks in the high yield bond market and a flattening yield curve. The S&P 500 Index fell 0.53% on November 15, its first daily drop of more than 0.5% in 50 trading sessions. High yield bonds traded lower five consecutive days beginning November 9th as weak corporate earnings releases from High Yield issuers in addition to concerns mentioned above had investors rethinking their risk appetites. The U.S. Treasury yield curve continued to flatten. Yield on the 2-year Treasury has been rising in line with expectations for further Fed rate hikes, while the 10-year Treasury yield has held relatively steady for the past several weeks around 2.35%. The yield spread between the two shrunk to 70 basis points midweek, a 10-year low. Historically, flattening yield curves have been harbingers for recessions. Finally, consumer inflation once again registered another benign performance. The Consumer Price Index (CPI) edged up by just 0.1% in October. Over the prior 12 months, headline CPI has risen 2.0% while “core” inflation, which excludes food and energy costs, rose 0.2% in October and 1.8% versus a year ago.

Activity in the Alternative Lending markets remained robust. SoFi announced that it priced its largest consumer loan deal and 11th securitization of 2017. SCLP 2017-6 was a $727 million issuance, making it the largest offering of securities backed by consumer loans. Investor acceptance continues to grow as measured by broadening participation, declining subordination levels, and upgrades on seasoned deals. SoFi reported that 5 new institutions joined the offering bringing total participation to 39. Marlette completed its fourth securitization pricing $312 million of securities. The deal was significantly oversubscribed allowing Marlette to price the deal at the tightest spreads ever (Class A priced at L+75 down from L+100 in MFT 2017-2 which priced in June). Kroll Bond Rating Agency (KBRA) assigned preliminary ratings to three classes of notes to be issued by Upstart Securitization Trust 2017-2 (“UPST 2017-2”). It is a $175.059 million consumer loan ABS transaction that is expected to close on November 21, 2017. Kabbage secured a new $200 million revolving credit facility from Credit Suisse this week bring total debt funding to $750 million.

Sources: TIAA-CREF, Wall Street Journal, PeeriQ

Posted on November 5, 2017November 6, 2017 by capaccel

November 5, 2017 – The U.S. economy generated 261,000 jobs in October, a robust number but below forecasts of over 300,000. Payrolls for the prior two months were revised upward by 90,000 though. The unemployment rate ticked down from 4.2% to 4.1%, its lowest level since December 2000 due primarily to a reduction in the labor force. Unexpectedly, wage growth came in at 0% month-over-month, versus expectations of 0.2%. Sluggish wages reflect a tilt in job creation toward lower-paying jobs, evidenced by an unemployment rate of only 5.7% among people without a high school degree, a 25-year low.

Previous to the jobs report, the Fed left rates unchanged saying that “the labor market has continued to strengthen and that economic activity has been rising at a solid rate” as underscored by the labor market report. However, the lack of rising wages and inflation continue to vex the Fed. They remain on course to “normalize” rates with another rate rise expected at its December meeting, but if inflation remains conspicuously absent, it is unclear how much further they will need to raise rates in 2018. President Trump nominated Jerome Powell to replace Janet Yellen as the next Fed Chair. From the markets’ perspective, appointing Powell is as close as one could come to keeping Yellen, given that he has sat on the Fed board during her entire tenure and has never openly dissented on a single Fed decision or given a contrarian speech during that time. Most Fed watchers consider Powell to be in the center of the dovish-hawkish spectrum, which suggests he will probably continue the Fed’s gradual, data-dependent shift away from accommodative monetary policy.

In the Alternative Lending space, another bank partnership was announced where Citizens Bank launched a new digital lending capability that will make it easier for small business customers to apply and receive approvals for loans. In collaboration with Fundation, the new lending platform advances Citizens’ strategy of leveraging innovative digital technologies that create excellent end-to-end customer experiences. Kroll Bond Rating Agency (KBRA) assigned preliminary ratings to three classes of notes to be issued by SoFi Consumer Loan Program 2017-6 (“SCLP 2017-6”), a $591 million consumer loan ABS transaction. This will be SoFi’s sixth consumer loan transaction for 2017.

Sources: TIAA-CREF, Wall Street Journal, PeeriQ

Posted on October 30, 2017 by capaccel

October 29, 2017 – The U.S. economy expanded at a 3.0% annual rate in the third quarter, just below its 3.1% second quarter pace. The U.S. economy has now registered 3% growth in back-to-back quarters for the first time since 2014. Personal consumption expenditures increased at a 2.4% annualized rate despite the hurricane-related damage to Florida and Texas. This most likely reinforces the premise that the Federal Reserve remains on track to hike rates in December despite “core” inflation of only 1.3% as measured by the Personal Consumption Expenditure index, the Fed’s preferred inflation gauge. Adding to the U.S. economic growth story is the budget resolution passing in both the Senate and the House of Representatives over the past two weeks which paves the way for tax reform. This resolution is especially important for Republicans because it will allow them, as the majority party, to pass tax legislation without any Democratic votes. The House is also preparing to introduce a bill into the Ways and Means committee, which, among other things, will provide details of proposed tax cuts and methods of generating revenue.

Buoyed by the GDP report and the prospects for tax reform, the S&P 500 Index gained 0.2% for the week after gaining 0.9% last week, its seventh consecutive one-week advance. Fixed-income markets reacted differently as the yield on the 10-year Treasury rose to 2.46%, its highest level since March 17 as the Chart titled, “Rates and Credit Spreads” highlights.

Credit spreads, as measured by Markit’s Investment Grade 5 year credit default swaps spread index, continue to tighten as growth picks up and corporate earnings remain strong. For Alternative Lenders, continued low rates and tight credits enable a robust lending environment.

CommonBond closed a $248 million securitization and received their first “AA” S&P rating. Similar to the first deal on the shelf, the senior tranche had a fixed and floating-leg. The fixed-leg priced 18 bps tighter than the prior deal at a 72 bps spread. Mosaic priced MSAIC 2017-2, their second solar ABS. The deal was heavily oversubscribed achieving record tight execution levels with over $1.7 Bn in orders for a $307.5 million deal.

Sources: TIAA-CREF, Wall Street Journal, PeeriQ

Posted on October 16, 2017 by capaccel

October 16, 2017 – Markets awaited the September FOMC minutes and Consumer Prices this week for further clues on inflation. Even though estimates were expected to be distorted (higher) due to the hurricanes, the numbers fell short yet again. The Consumer Price Index (CPI) rose 0.5% in September and 2.2% over the past year. However, core inflation, which excludes food and energy costs, rose a much smaller 0.1% last month and 1.7% year over year, a level that’s remained unchanged for five consecutive months despite a labor market that continues to tighten. Minutes from the Fed’s September meeting indicated officials were split over questions of inflation regarding whether the soft patch was due to temporary factors or longer lasting developments. Most Federal Reserve officials believed that they would likely raise short-term interest rates again this year, but some cautioned the decision would hinge on whether inflation picks up. Fed Chairwoman Janet Yellen said in a speech Sept. 26 she expected another rate increase this year, but she was open to changing her mind. Economic data will continue to drive decisions by the Fed. Market probabilities still show a 75% probability for a December rate hike with 1.5 hikes now priced in for 2018.

Alternative Lenders are taking advantage of both low rates and tight credit spreads. SoFi priced their fifth student loan securitization this year, SOFI 2017-E last week. With a $777 million deal size, it’s SoFi’s largest student loan deal to date. Marlette is in the market with their third consumer loan securitization for 2017. Marlette Funding Trust 2017-3 is expected to close at the end of October with $298 million in loans. Prosper Funding LLC filed form 15G with the SEC for a securitization of consumer loans. PMIT 2017-3 will be the third transaction for Prosper this year. CommonBond Student Loan Trust 2017-B-GS also filed form 15G with the SEC for a securitization of student loans. In M&A news, Navient announced it would acquire Earnest for $155 million in cash. The acquisition, which is expected to close in Q4 2017, marks the entry of Navient into the private student loan refi market where it will compete with the likes of SoFi, CommonBond, Citizen’s Bank, Wells Fargo, and First Republic Bank. Overall, Navient’s acquisition of Earnest is consistent with a larger trend of traditional financial services firms marrying their resources with nimble financial technology firms.

Sources: TIAA-CREF, Payden & Rygel, Wall Street Journal, Orchard Platform, PeeriQ

Posted on October 2, 2017 by capaccel

October 2, 2017 – Fed Chair Yellen took the stage this week and reiterated that policymakers continue “to anticipate that inflation is likely to stabilize around 2 percent over the next few years” and that the recent bout of “low inflation is probably temporary.” Her comments arrived before Friday morning’s release of the August core personal consumption expenditure (PCE) price index. The Fed’s preferred measure of inflation fell to 1.29% year-over-year. As such, policymakers may have trapped themselves with the self-imposed “2% target” potentially proving difficult to hike in December unless monthly inflation numbers move back toward their target. For now, market participants are anticipating another hike at the end of the year but as has been the case historically, economic data will continue to drive rate decisions.

The 10 year Treasury backed up roughly 8 basis points on Yellen’s comments in addition to President Trump’s outline of tax cuts which implies more deficits. Since the beginning of the year, rates have traded in a narrow 60 basis point range and since April of this year, have traded in an even tighter range of 40 basis points. Credit spreads also remain in a narrow trading range in addition to remaining near historical lows. The lack of volatility in the market and stable rates continue to provide a robust backdrop for online, balance-sheet light lenders.

Sources: TIAA-CREF, Payden & Rygel, Wall Street Journal

Posted on September 25, 2017September 25, 2017 by capaccel

September 25, 2017 – The Fed left rates unchanged and indicated one more rate rise in 2017, signaling continued optimism about the economy even though persistently low inflation has prompted some officials to voice greater skepticism about a move this year. The Fed also said it would begin shrinking its balance sheet starting next month. Both moves were widely anticipated by the markets. The lack of inflation, however, as the economy has recovered has officials perplexed. Fed Chair Yellen commented, “I can’t say I can easily point to a sufficient set of factors that explain this year why inflation has been so low.” That sentiment is being reflected in Fed officials’ latest economic projections where they still expect to raise rates one more time this year, but also show rate increases are likely to end at a lower point than they had previously projected. The median projection for the longer-run level of interest rates edged down to 2.75% from 3% in June. Fed officials released their projection of interest rates for 2020 for the first time, and they imply many officials see little need to raise rates after 2019. They continue to expect three rate increases next year, two in 2019 and one in 2020.

ABS East continued as scheduled in Miami this week despite Hurricane Irma. Overall, the mood was upbeat. Yield compression and uncertainty around credit risk is driving investor demand for shorter duration assets. Despite credit deterioration in the unsecured personal loan space, strong structural protections and credit enhancement has enabled ABS spreads to tighten. Prosper closed on a Series G transaction where they raised $50 million from an investment fund co-managed by FinEx Asia and LPG Capital based in Hong Kong. Sources said the post money valuation was $550 million. In another bank partnership, JPMorgan Chase made an investment in Bill.com and plans to integrate Bill.com’s systems into their own early next year. Bill.com facilitates B2B payments by eliminating the need for physical checks and allowing users to process everything online. Prior investors in Bill.com include Bank of America, American Express, and Fifth Third Bancorp.

Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources: Orchard Platform, PeeriQ, Wall Street Journal

Posted on September 18, 2017 by capaccel

September 18, 2017 – It was an extremely active week in the Alternative Lending space. Goldman Sachs agreed to buy $300 million of loans from Mosaic and multiple sources reported that they hired approximately 20 employees away from the small business lender, Bond Street, in an effort to launch a small business lending offering themselves. Goldman Sachs believes lending will be the biggest driver of net revenue growth in years to come, with its President, Harvey Schwartz, describing direct lending as a $2 Billion annual revenue opportunity by 2020. It was also reported that Goldman will expand their new online retail banking offerings to the U.K.

Mike Cagney resigned as CEO of SoFi and stepped down from the Board. Despite the negative headlines SoFi’s growth engine continues produce in record numbers. In Q2 2017 alone, SoFi funded $3.1 billion in loans with $134 million in revenue and $61.6 million in adjusted EBITDA. Revenue and adjusted EBITDA were up 67% and 60% year over year respectively. SoFi priced its latest personal loan securitization (SCLP 2017-5) this week with strong initial interest, however the bonds priced slightly wider than guidance given the news this week.

Atlanta-based real estate crowdfunding platform, Groundfloor, announced that it entered into a whole loan purchase relationship with Direct Access Capital, a specialty finance company that focuses on providing liquidity to non-bank lenders. They are targeting $100 million in loans through 2018. It was also reported that Lima One Capital, a lender for residential real estate, bought the residential lending business of RealtyShares. This will allow RealtyShares to focus on its commercial and multifamily real estate lending business. RealtyShares is also raising a $28 million Series C round led by Cross Creek Advisors, with participation from existing investors including Union Square Ventures, General Catalyst Partners, and Menlo Ventures.

Finally, Kroll Bond Rating Agency assigned preliminary ratings to three classes of notes to be issued by Consumer Loan Underlying Bond (CLUB) Credit Trust 2017-P1 (“CLUB 2017-P1”). This is a $363 million consumer loan ABS transaction by LendingClub Corporation that is expected to price this week.

Sources: Orchard Platform, PeeriQ

Posted on September 11, 2017September 11, 2017 by capaccel

September 11, 2017 – The yield on the 10 year Treasury fell to a 10-month low of 2.05% this week. Year to date, it’s down roughly 40 basis points, confounding widely held expectations that Treasury yields would climb in 2017 given strong labor market conditions, Fed tightening, and the potential for stimulative tax and fiscal policy. Among the current concerns reflected in the falling 10-year yields are the geopolitical risks (i.e., North Korea) and the political gridlock in Washington. Additionally, current Treasury yields are an expression of the market’s views on the risks (or lack thereof) of future inflation, the perceived likelihood of central bank actions, and the outlook for U.S. and global growth. One could infer the week’s drop in Treasury yields primarily reflects slower moves by the Fed and other central banks to raise short-term interest rates amid stubbornly low inflation levels globally. For Alternative Lenders, persistently low rates help drive loan growth higher as lower lending rates become attractive to borrowers. Additionally, institutional investors are attracted to Alternative Lending loans as they seek higher risk adjusted returns not afforded in the traditional capital markets.

Also noteworthy this week was the surprise resignation of Federal Reserve Board Vice Chairman Stanley Fischer who is stepping down well ahead of the June 2018 expiration of his term. His imminent departure adds to uncertainty about the Fed’s future direction, as Chair Janet Yellen’s term is set to expire in February 2018, (she is not expected to be reappointed by President Trump). As of mid-October, the Board will have four vacancies, unless someone is appointed in the coming weeks. Shifts in the composition of Fed leadership carry potentially huge implications for bond markets, not only in the U.S., but also globally.

Finally, competition in the Alternative Lending industry continues to accelerate. American Banker reported that mobile payments firm, Square, filed for a banking charter this week, becoming the latest company to do so. Similar to SoFi attempt to attain a bank charter, this would allow them to offer deposit accounts, loans, and other banking services to their small business customers.

Sources: TIAA-CREF, Orchard Platform